One look at Walgreens’ (NASDAQ:WBA) stock chart tells you that it hasn’t been a good year for the embattled retail pharmacist. The company is taking hits from several angles, and its previous CEO left the company in August. While there are challenges here, there’s still lots to like about this battered stock.
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I’m bullish on WBA because its valuation looks attractive, with shares trading at under 7 times forward earnings. Additionally, Walgreens’ dividend yield of over 8% is an attractive proposition for income investors in any interest rate environment. Lastly, as an added bonus, the company just appointed a new CEO with plenty of healthcare sector experience, paving the way for a blank slate and a potential turnaround. Let’s take a closer look at Walgreens.
Rock-Bottom Valuation
It’s no secret that Walgreens faces plenty of challenges. Like many retailers, the company has been hurt by shrinkage (loss of inventory) as a result of rising theft across the country. Like other businesses, it is also dealing with strikes by employees. Meanwhile, it is even dealing with the longer-term, existential threat of new, deep-pocketed competitors like Amazon (NASDAQ:AMZN) and Mark Cuban’s Cost Plus Drugs that are looking to enter the industry and disrupt Walgreens’ business model.
Clearly, the stock has some issues, but that’s also why it is so glaringly cheap. As mentioned earlier, the stock trades at under 7 times forward earnings. It’s difficult to find stocks that trade for this cheap, let alone a well-recognized blue-chip one like Walgreens.
This isn’t a penny stock or a fly-by-night company. Walgreens is a longstanding Dow component, not to mention a Dividend Aristocrat that has raised its annual dividend payout for an incredible 46 years in a row. The company has stood the test of time for 122 years, as it was founded in 1901.
When a stock gets this cheap, it is, of course, a sign that it is struggling and that the future outlook is cloudy, but it also gives investors a margin of safety, which can lead to profits. For example, look at struggling stocks with solid businesses like Chico’s FAS (NYSE:CHS) and Capri Holdings (NYSE:CPRI). I have owned both, and both traded at mid-single-digit valuations this year before being acquired by a competitor or taken private for significant premiums.
I don’t necessarily think that Walgreens is going to get acquired or that this is the primary reason one should invest in the stock, but it illustrates that a well-recognized, solid company has plenty of optionality when it trades at this inexpensive of a valuation.
Dividend-King Status on the Horizon
Now, back to that dividend. Walgreens’ dividend yield currently stands at a mouth-watering 8.4%. This easily dwarfs the S&P 500’s (SPX) average dividend yield of 1.6% and far surpasses the 10-year treasury yield of 4.7%, making it an attractive option for dividend investors even in a world of rising interest rates.
When a dividend yield gets this high, often as a result of a stock’s price falling, caution is often warranted. An outlandishly-high yield can be a red flag signaling that a company may reduce or eliminate its dividend payment.
But I don’t think Walgreens will do this. As mentioned earlier, WBA is a Dividend Aristocrat and has raised its payouts for 46 consecutive years. This puts it right on the precipice of joining an even more prestigious group of stocks — Dividend Kings — companies that have increased their annual dividend payouts for 50 years or more.
Furthermore, the company’s dividend payout ratio is 46%, so it doesn’t seem that there is a pressing need to cut it. Anything can happen, and caution is warranted, but I find it unlikely that Walgreens would cut its dividend and throw away nearly 50 years of commitment to shareholder returns shortly before becoming a Dividend King.
A Low Bar for the New CEO
This week, Walgreens appointed a new CEO, Tim Wentworth. Wentworth is a healthcare industry veteran who previously served as CEO of Express Scripts. After Express Scripts was acquired by Cigna (NYSE:CI), Wentworth led its health-services segment, Evernorth.
While we don’t yet know how the new CEO will perform or what his plans are, he certainly has the right type of experience. The stock could rebound based on a clearly articulated turnaround plan and signs of progress against it.
The stock rallied on Thursday after what was a fairly underwhelming earnings report — Walgreens missed on earnings and issued soft guidance for next year’s earnings — but it wasn’t all bad. Walgreens’ revenue grew by 9% year-over-year, thanks to momentum in its Retail Pharmacy business and International segment. The company is also making progress on its cost-cutting plans, which include closing unprofitable stores and utilizing AI to streamline its supply chain.
In summary, the bar is set fairly low in terms of investor expectations, giving Wentworth the opportunity to hit the ground running and beat these low expectations, which could get the stock going again. WBA is still down 46% from its 52-week high. It wasn’t that long ago that the stock traded for over $40 a share. Given this low bar and the stock’s rock-bottom valuation, I don’t think it will be a tall order to move higher from here.
Is WBA Stock a Buy, According to Analysts?
Turning to Wall Street, WBA earns a Hold consensus rating based on one Buy, eight Holds, and one Sell ratings assigned in the past three months. The average WBA stock price target of $26.56 implies 16.8% upside potential.
Investor Takeaway
Walgreens certainly has some hair on it. As discussed above, the company must grapple with serious challenges both in the short term and the long term. But it trades at an incredibly inexpensive valuation, especially for a soon-to-be Dividend King and a member of the Dow Jones Industrial Average (DJIA).
The stock’s dividend yield of 8% is attractive even amid higher interest rates, and a newly-appointed CEO gives the stock a chance for a fresh start. I view Walgreens as a compelling contrarian investment opportunity and recently initiated a small position in my portfolio.
